21 Oct How Much Life Insurance Do I Need?
When it comes to life insurance, it is essential to have—to protect your family at the time of your death and leave them a non-taxable sum of money. Besides covering your mortgage and personal loans, it can also be used to pay for your car or end of life expenses.
But, you may be wondering how much life insurance do I need or, specifically, how much term life insurance do I need? In this article, we’ll help you calculate the answer in a variety of ways.
Why Do Veterans Buy Life Insurance?
Life insurance is an essential component of any financial plan, which includes veterans, active-duty military, and other service members. Despite it being complicated to understand at times, having life insurance protects your loved ones from financial hardship once you’re gone.
How Life Insurance Can Help Veterans and What Life Insurance Covers
Life insurance should be limited to covering funeral expenses or any outstanding debts if a veteran or other personnel should die without survivors.
To protect the family against financial ruin, it is wise to acquire life insurance during marriage and when children are young. Service members who plan to marry or have children should explore their life insurance options as well.
How Much Life Insurance Do I Need? Calculator for Veterans
Life insurance amounts may vary according to your financial and personal circumstances. This is why it is essential to use a life insurance calculator that helps you to make an informed decision.
When determining the amount of life insurance a family needs, the general idea is to estimate the family’s actual financial situation if the policyholder dies. A life insurance policy is not a manifestation of affection or an indication of a person’s importance. It provides coverage in the event of premature death, and it protects dependents from financial hardship if a provider passes away.
Insurance coverage should be sufficient enough to enable a military family member to live comfortably. Veterans should consider the expenses their surviving family members will incur and their income in the years following their own death. Income and costs can be matched, so policyholders can easily see the shortfalls (if any) that they should consider life insurance for.
Need to file a life insurance claim? Here’s how
Use a Life Insurance Calculator
Life insurance companies usually recommend six to ten times one’s salary for a reasonable amount. Alternatively, you can multiply your annual salary by the number of years until retirement to calculate how much life insurance you need. Many policyholders use a term insurance premium calculator as part of their decision-making process.
For example, an individual who earns $20,000 per year at age 40 will need life insurance coverage for $500,000 if they plan to retire at 65 (25 years x $20,000).
For determining your life insurance needs, you can follow a general rule of thumb with this calculation:
[Financial obligations you want to cover] – [ Assets you have that can be used toward bills] = Your life insurance need
An obligation to make payments or to repay debts represents a financial obligation. In other words, if you owe or will owe money to anyone, it is one of your financial obligations.
An individual should consider more long-term financial obligations when planning over extended periods, such as their mortgage, health care costs, child’s college tuition, debt, income replacement, and more.
Any financial obligations that could potentially outlive you should be factored into your life insurance calculation.
People usually have tangible assets, such as a home or valuable item, and liquid assets, such as retirement and savings accounts, expected to gain value over time.
If you benefit financially from your life insurance policy while you are alive, that makes it an asset. Insurance plans that only pay your dependents in case of your death are not assets. In general, whole life insurance policies and policies with a cash value component are considered assets because they can be withdrawn while you are alive.
Existing assets include existing life insurance policies, such as coverage through your employer, bank, or credit union, as well as any savings, 529 college plans, burial insurance, or pre-paid funerals.
Other Methods for Calculating Life Insurance Needs
You can determine your life insurance needs in various ways, including a multiple-of-income approach, the DIME method, and capital needs analysis.
Using a multiple-of-income approach is the most straightforward way to estimate an appropriate life insurance coverage amount. Using this method, the primary breadwinner’s salary will be replaced for a certain period.
Assuming that you want to provide financial assistance to your survivors as the breadwinner, multiply your current income by the number of years you wish to cover. This amount of coverage is recommended to be between seven and ten years.
The Classic 10x Rule1 (Multiply Your Income by 10)
The Classic 10x Rule is the most basic method of determining life insurance needs. It can serve as a starting point, but it’s just a way to get a quick rough estimate when comparing life insurance quotes.
The 10x rule is simply a multiplier that calculates how much life insurance you will need based on your annual salary multiplied by 10.
So, if you make $50,000, you would establish your life insurance at $500,000. Your spouse would do the same.
Despite the simplicity, it is not a good way to determine an appropriate life insurance amount.
The DIME Method
The acronym DIME stands for Debt, Income, Mortgage, and Education. Your base life insurance number is calculated by adding the expenses for each category.
To calculate yours, add the following:
(+) Debts that you have now
(+) Your annual income (multiplied by the number of years you estimate your dependents will have to live off of it in the future)
(+) The remaining mortgage balance
(+) An estimate of the future cost of the children’s education
Therefore, the basic formula will be
|D + I x (Number of years with a dependent on it) + M + E =||Your base number|
Questions for Veterans When Determining How Much Life Insurance to Buy
Here are the most frequently asked questions we receive about determining the right amount of life insurance coverage.
What if I Have Life Insurance Through My Employer?
An employer may provide life insurance as a benefit for employees by paying a portion of their premiums. Typically, it is a multiplier of the salary or a fixed amount. This is a great benefit, but it’s not the only life insurance you should have.
Why? There’s always a possibility of losing your job or quitting. Without the job, you will have to apply and get approved for a new life insurance policy. Having a personal life insurance policy gives you control and security.
Additionally, employer-sponsored life insurance policies work differently than many term life insurance policies. As you get older, your premium will increase. But, with term life insurance, you get to pick the amount and the premium is fixed for the entire policy term.
Do Both My Spouse and I Need Life Insurance?
The death of a spouse, particularly in a partnership that has turned into a family, can be devastating for the surviving partner financially. A term life insurance policy is an affordable way to protect loved ones from financial hardship. People often assume life insurance is only for the primary breadwinner, or that the partner with more significant income needs more coverage than the partner with less income.
Men with life insurance tend to take out more coverage than women, creating a life insurance gender gap. Despite your gender identity, you should account for the financial advantages you bring to your marriage or partnership: income, caregiving, household management, and more.
Many people realize that life insurance can replace the payment of a primary breadwinner. Still, they forget that it can also cover child care costs or household maintenance costs if the primary caregiver dies.
So, do both you and your spouse need life insurance? Often, the answer is yes.
What if I Need to Change the Amount of Coverage Later On?
There is no way to change your coverage level if you already have a small-term life policy. However, you can get a new term life policy to provide the added coverage you need.
You can purchase term life insurance that covers you for a finite period, such as 10, 15, 20, or 30 years, and pays beneficiaries if you die within that period or covers you until a particular age, such as 65 or 70. The plan is designed to replace your income if you die, so your family can continue paying for things like a mortgage and college tuition for your children.
If you outlive the policy, a return-of-premium term life insurance policy may be an option for you, which pays back all or part of your premiums. These policy premiums are likely to be higher over time compared to a similar traditional policy.
Do You Really Need to Buy Life Insurance?
The answer is simple. Yes, you need to buy life insurance. While it is a bit of a somber topic to discuss, it’s also a very important one. Just pay a small amount each month so that your chosen beneficiary receives a sum of money if you pass away that will enable them to maintain their standard of living. In case of your passing, your loved ones (partner, spouse, kids, etc.) will not have to work multiple jobs or struggle.
How Much Life Insurance Can I Get?
How much life insurance should I get is sometimes mistaken for what’s the maximum amount of coverage I can carry. For most people, if they are 40 or younger, their life coverage can be up to 25 times their annual income. When people turn 40, that multiplier decreases by five every ten years. Generally, someone aged 41-50 is eligible for coverage that is 20 times their income, 15 times their income between 51 and 60, and 10 times their income until 70.
How Many Life Insurance Policies Can I Have?
There is no legal limit on how many life insurance policies you can own. There is usually no concern over the number of life insurance policies you own with most life insurance companies. However, before approving any additional policies, they will consider the total amount of coverage you already have.
Life Insurance Is More Affordable Than You Think
A permanent life insurance policy as an investment may be a beneficial choice for specific high-net-worth individuals. However, in reality, buying term life insurance and investing the difference is a better option and more affordable than most people think. However, figuring out how to determine how much life insurance you need pertains to your individual situation and family’s financial needs, in the event something happens to you.
A large number of households are not purchasing life insurance because they think it’s too expensive or don’t understand the purpose, which is a big risk. Compared to the financial ruin uninsured couples and families may face following a tragedy, the cost will help you sleep better at night.